China / Hong Kong Company Guide CSI Properties Version 1 | Bloomberg: 497 HK Equity | Reuters: 0497.HK Refer to important disclosures at the end of this report DBS Group Research . Equity 31 May 2018 BUY (initiate coverage) Small but pretty Last Traded Price ( 31 May 2018):HK$0.510 (HSI : 30,469) An astute property company with a unique winning formula Price Target 12-mth: HK$0.64 (25% upside) Multiple growth catalysts in place Analyst Initiating coverage with BUY rating and HK$0.64 TP Jeff YAU CFA, +852 2820 4912 [email protected] An astute property company with a unique winning formula Under Ian CHUI +852 2971 1915 the leadership of the Chairman, Mr. Mico Chung, CSI Properties has [email protected] been widely recognised as a shrewd property trader in Hong Kong Jason LAM +852 29711773 after a series of astute investment decisions throughout the years. The [email protected] management excels in identifying appropriate property investment opportunities, executing value enhancement initiatives, and making Price Relative timely decisions in realising the property value, which differentiates the company from its peers and continues to propel its growth. Multiple growth catalysts in place. CSI Properties increased its property development activities in recent years which should enhance its earnings visibility in the long term. Successful sale/pre-sale of Kau To Highland, COO Residence, 38 Wai Yip Street and 2-4 Shelly Street should have locked in >HK$1.3bn pre-tax profits for CSI Properties in FY19-20. The company boasts a luxury residential portfolio in superb locations such as The Peak and Jardine’s Lookout which should be Forecasts and Valuation FY Mar (HK$ m) 2017A 2018F 2019F 2020F well sought after by the affluent when offered for sale. CSI Properties Turnover 1,868 3,881 3,937 2,800 is also strengthening its foothold in Central office/commercial market EBITDA 1,567 917 1,806 1,378 where demand/supply imbalance prevails. Pre-tax Profit 1,367 1,072 1,410 2,246 Net Profit 1,347 988 1,076 2,022 Initiating coverage with BUY rating and HK$0.64 TP. The stock is Net Profit Gth (%) (18.1) (26.7) 8.9 87.9 trading at 69% discount to our assessed current NAV and PE of 4.8- EPS (HK cts) 13.42 9.84 10.72 20.14 5.2x for FY18-19. Despite the share price rally this year, valuation EPS (HK$) 0.13 0.10 0.11 0.20 EPS Gth (%) (15.2) (26.7) 8.9 87.9 remains inexpensive taking into account the company’s proven track PE (X) 3.8 5.2 4.8 2.5 record of creating shareholders value. The planned launch of its luxury P/Cash Flow (X) nm 40.6 3.0 nm residences should serve as a share price catalyst for the year ahead. EV/EBITDA (X) 12.7 21.7 11.0 14.5 DPS (HK cts) 1.62 1.18 1.29 2.42 The company also stands to benefit from expected office/commercial DPS (HK$) 0.02 0.01 0.01 0.02 price appreciation in Central given its growing exposure there. Div Yield (%) 3.2 2.3 2.5 4.7 Potential stake increase by major shareholder could cushion the Net Gearing (%) 67 71 62 56 ROE (%) 13.2 8.3 7.9 13.5 downside risk of share price, if any. Therefore, we initiate coverage on Est. NAV (HK$): 1.6 1.8 CSI Properties with a BUY rating and TP of HK$0.64, premised on a Disc. to NAV (%) (69) (72) 65% discount to Jun-19 NAV estimate. Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX Valuation: Our TP is based on 65% discount to our Jun-19 NAV estimate. Key Risks to Our View: Any softening in luxury residential demand in Hong Kong could impact earnings and valuation. Any prolonged property market downturn would inevitably impact the marketability of the properties held for sale. At A Glance Issued Capital (m shrs) 10,037 Mkt. Cap (HK$m/US$m) 5,118 / 652 Major Shareholders Mr. Mico Chung (%) 49.90 Dalton Investments (%) 6.96 Value Partner (%) 6.91 Free Float (%) 36.23 3m Avg. Daily Val. (US$m) 0.7 ed- JS / sa- CS / AH Company Guide CSI Properties Table of Contents Investment Summary 3 Company background 5 Property development to enhance earnings visibility 6 An overlooked Central commercial play 7 Luxury portfolio a gem 8 Various initiatives to exploit property values. 9 Joint venture to propel growth 10 Earnings recovery on the horizon 11 Financial Position 11 Valuation 12 Appendix 1: A look at Company's listed history – what drives its share price? 16 Appendix 2: Hong Kong properties for sale 20 Appendix 3: China properties for sale 26 Appendix 4: Investment and hotel properties 27 Appendix 5: Management Profile 28 Page 2 Company Guide CSI Properties Investment Summary Major shareholder casts a vote of confidence over the A well-recognised property trader with a unique winning company’s prospects. Throughout the years, Mr. Chung has formula. Mico Chung, the company’s Chairman, took control repeatedly cast his vote of confidence on the company’s of CSI Properties in Feb-04. Under the leadership of Mr. prospects through raising his stake in the company to the Chung, CSI Properties is now reputed to be a shrewd property current 49.9%. This signals the strong embedded value of the trader with a string of astute investment decisions made. stock, thus supporting its share price. Throughout the years, the company has established a proven track record of creating shareholders value though identifying Undemanding valuation with multiple catalysts in place. The appropriate investment opportunities, executing value stock is trading at 69% discount to our assessed current NAV, enhancement initiatives and crystallising asset values. and PEs of 4.8-5.2x in FY18-19. Valuation is by no means demanding. The planned launch of its luxury residences, if Property development to enhance earnings visibility. In recent greeted with enthusisatic response, should unlock its NAV, years, CSI Properties has redeployed more resource to providing upside on the stock. CSI Properties also stands to property development which should strengthen the benefit from continued price appreciation of company’s earnings visibility. With successful sale/pre-sale of office/commercial properties in Central given its exposure Kau To Highland, COO Residence, 2-4 Shelly Street, and 38 there. Earnings visibility is set to improve along with growing Wai Yip Street, we estimate CSI Properties has already locked property development activities. Potential stake increase by in development income of over HK$1.3bn in FY19-20. major shareholder could cushion potential downside risks on share price. An overlooked Central commercial play. CSI Properties has gradually built up an office/commercial portfolio near the BUY rating with HK$0.64 TP. Applying a target discount of Central/Mid-levels escalator system. This makes the company 65% to our Jun-2019 NAV estimate, we derive a target price a prime beneficiary of continued commercial price of HK$0.64 which offers 25% potential upside from the appreciation in Central. The recent launch of 2-4 Shelly Street current level. Thus we initiate our coverage on the stock with met with encouraging market response. The nearby a BUY rating. office/commercial project at 46-48 Cochrane Street should be equally popular among buyers when offered for pre-sale in Key investment risks. The company’s ability to crystallise asset 2019 while Graham Street commercial redevelopment, a joint values with capital recycled to other new investments with venture with Wing Tai Properties (369.HK), offers good long- better earnings potential plays a crucial role in driving CSI Properties’ long-term growth. Any prolonged property market term upside. downturn would inevitably lessen its ability to realise the value of its properties held for sale, especially commercial Luxury portfolio a gem CSI Properties boasts a unique properties. This would affect the company’s cash flow and its portfolio of super luxury residences in Hong Kong that is set refinancing ability. To minimise this risk, CSI Properties holds to be well sought after among affluent buyers. The Perkins >HK$3.8bn worth of investments held for trading which is Road project at Jardine’s Lookout is envisaged to be released very liquid in nature and could be used for debt repayment, if for sale in late 2018, followed by the phased sale of 8-12 Peak necessary. Road refurbishment project. The residential development at 47 Baker Road on the Peak is one of its kind by virtue of its coveted address and unparalleled views. The superb luxury manors in Sheung Shui should also achieve premium pricing. Overall, our analysis suggests that these luxury residences should yield total attributable pre-tax profit of over HK$2.5bn to CSI Properties. Concerns over relatively higher financial leverage should not be overdone. Including off-balance sheet debt, CSI Properties’ net debt to total asset ratio is close to 40%, which appears higher than the Hong Kong-based developers or landlords. As of Sep-17, the company maintained >HK$3.8bn as investments held for trading which is very liquid in nature and can be used for debt repayment, if necessary. Hence we should not place too much concern on its financial risk. Steady divdiend payout ratio. In recent years. CSI Properties maintained a relatively stable dividend payout ratio of 12- 15%. Based on dividend payout ratio of 12%, we estimate CSI Properties’ DPS to be HK$0.0118, HK$0.0129, & HK$0.0242 cents in FY3/18, FY3/19 and FY3/20 respectively, translating into dividend yields of 2.3-4.7%.